UK inflation unchanged ahead of key Bank of England decision - what it means for you

UK inflation has stayed above the Bank of England target, remaining at 2.2% in the 12 months to August.

This is the same figure that was recorded in July. Inflation had previously fell to the Bank of England target of 2% in May this year and it remained at this level in June. The previous drop in inflation had paved the way for the first Bank of England interest rate cut since March 2020.

Inflation shows how the prices of goods and services have changed over time with the Consumer Price Index (CPI) being the primary measure of inflation. The Office for National Statistics (ONS) releases inflation data every month and said the biggest change in August was a large monthly rise in air fares - but this was offset by lower petrol and diesel prices, as well as falling costs at restaurants and hotels.

But in less positive news, core inflation - which excludes energy, food, alcohol and tobacco, and is closely watched by the Bank of England - rose from 3.3% to 3.6%. The ONS said services sector inflation also jumped from 5.2% to 5.6%.

The latest inflation release comes just before the Bank of England makes its next interest rates decision tomorrow (September 19) at 12pm. It's expected the base rate will be held at 5%. The Bank of England has previously said it wants to see evidence that inflation remains under control before it can cut interest rates.

Grant Fitzner, chief economist at the Office for National Statistics, said: “Inflation held steady in August as various price fluctuations offset each other. The main movements came from air fares, in particular to European destinations, which showed a large monthly rise, following a fall this time last year.

“This was offset by lower prices at the pump as well as falling costs at restaurants and hotels. Also, the prices of shop-bought alcohol fell slightly this month, but rose at the same time last year. Following two months of growth, raw material prices fell, driven by lower crude oil prices, while the increase in the cost of goods leaving factories slowed again.”

Darren Jones, Chief Secretary to the Treasury, said: “Years of sky-high inflation have taken their toll; and prices are still much higher than four years ago. So, while more manageable inflation is welcome, we know that millions of families across Britain are struggling, which is why we are determined to fix the foundations of our economy so we can rebuild Britain and make every part of the country better-off.”

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What is inflation?

The ONS uses a regularly updated "basket of goods" and services to measure price rises. The ONS releases the latest inflation data every month - but the main CPI figure you see in headlines is used to represent an average. This means the individual prices of some goods may be higher or lower than this central figure.

What does it mean for prices in shops?

When inflation is lower, it does not mean prices have stopped rising - it just means they're going up at a slightly slower rate than before. For example, the rate of inflation is now at roughly 2% - so this means an item that cost £1 last year would now cost £1.02.

How is inflation linked to interest rates?

The Bank of England has put up interest rates to try and lower inflation. The base rate influences the interest rate you're offered by banks and lenders - so when it is higher, borrowing becomes more expensive and this means people have less money to spend elsewhere.

When people spend less money, this brings down demand and lower prices, which should then lower inflation. But a higher base rate has pushed up mortgage payments for millions of homeowners, leaving households financially stretched.

Higher borrowing costs also risks damaging the economy. The base rate stood at just 0.1% in December 2021. It reached a peak of 5.25% in August 2023 and was finally been cut to 5% on August 1. The next base rate decision is due on September 19.

Why did inflation peak?

Inflation peaked at 11.1% in October 2022. It began to rise in 2021 largely due to higher costs of energy and food. Demand for energy increased after Covid and then this was exasperated by the Russian invasion of Ukraine.

The war also pushed up food prices, due to rising costs for fertilisers and animal feed. Both energy and food price rises have come down in recent months, although they are still higher than before.

Will inflation keep rising?

The Bank of England expects inflation to rise to about 2.75% in the second half of this year, following sticky price rises in the service sector and strong wage growth. It then expects inflation will fall back down to 1.7% in 2026, then to 1.5% in 2027.

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